Many high school seniors and their parents are very familiar with the Free Application for Federal Student Aid, or FAFSA. For those who have not yet filed or are working through the litany of acronyms associated with the world of college financial aid, this is the first step in applying for need-based scholarships. The information provided on the FAFSA College Scholarship Service (CSS) Profile will produce the student’s Expected Family Contribution, better known as EFC. This article will explore how this figure is calculated and why is it such an important part of a sound college planning strategy.
What Is Your EFC?
EFC is the minimum dollar amount that a student is expected to contribute toward the cost of college. Since aid applications are submitted every year, a new EFC will be generated for each school year. And the starting point for this process is to understand what the student’s total cost of attendance is.
Cost of attendance is essentially the student’s budget. It is comprised primarily of:
- Tuition & fees
- Books & supplies
- Room & board
- There is also a small allowance for personal and miscellaneous expenses.
EFC is the amount used to determine the student’s eligibility for need-based financial aid. It is simply subtracted from the cost of attendance.
The end result is what the student needs to fill the gap between what he or she will spend and what his or her family can afford to pay.
Cost of Attendance - EFC = Financial Need
The information used to determine a student’s EFC is provided on one of two aid applications, the FAFSA or CSS Profile. All colleges require the FAFSA, but some also require the CSS to determine eligibility for aid. In other words, not all institutions use the CSS to make financial aid decisions. Aid applications are then processed using one of three methods.
- Federal Methodology
- Institutional Methodology
- Consensus Methodology
FAFSA uses the Federal Methodology. CSS uses either the Institutional or Consensus Methodology.
The Federal Methodology is the formula used by the federal government to determine EFC for Pell Grants, campus-based programs, and federal loans. The Consensus Approach Methodology deals exclusively with the ability of families to pay for college. The Institutional Methodology builds a complete picture of a family's situation to determine its financial strength.
The results of these various calculations are sent to the student and college financial aid departments of the schools selected by the students on their applications.
How Is FEC Calculated?
The EFC formula focuses on the assets and income of individual students and their parents. Also considered are the size of the family and the number of children in college each year. But each aid calculation (Federal, Institutional, and Consensus) is different.
This is why it is so important for students and parents to understand before applying which colleges use which calculations. The reason for this is that two different schools can arrive at two substantially different EFC results for a given student using the exact same asset and income information.
This means that two different colleges using the same methodology (i.e., Federal, Institutional, or Consensus) can arrive at two completely different aid packages.
Aid formulas expect parents to contribute a large percent of their income to their children’s education expenses, after deducting taxes and a modest allowance. Students are expected to contribute a larger percent of their income than their parents. These are standardized in the EFC calculation.
Both parents and students are also expected to contribute some portion of their assets to education expenses. And there are standardized assessments rate for this. As is the case for income, the student’s assessment rate is higher than the parents’ rate. For both, the assessment rate is considerably smaller than the percentage of income considered in the calculation.
Parents receive a savings allowance, but students do not. Retirement assets are not counted in any of the aid calculations and assets such as home equity, annuities, and small businesses are weighed differently based on the type of aid methodology being used.
Planning can Help you Optimize Savings and FEC
Understanding your child’s EFC will provide insight into his or her aid eligibility, help you determine the affordability of a particular school, and help you map out potential planning strategies.
As you run through this exercise for a given institution, remember that if EFC based on parental income alone is higher than the cost of college, then the student will not qualify for need-based aid. Your focus in this instance might want to shift to merit aid and the best use of your personal resources.
If your income-only EFC is lower than the cost of college, then there is the potential to reposition assets and increase need-based aid. However, before selling assets you should examine the tax consequences, the impact on financial aid in the following year, and the impact on your other consumption goals (e.g., retirement).
If your child does qualify for need-based aid, that does not mean all of it will be granted. That’s why you still need to plan how you’ll pay your share of the cost. Sacrificing one consumption goal to finance another isn’t an optimal strategy. This is why planning well in advance is the best way to optimize savings and EFC.
Putting your children through college is an important goal for most parents. It requires a big investment. As with any other large consumption goal, attaining it requires careful planning. Failing to plan for it could result in your children being laden with enormous student loan debt. Or it could jeopardize your retirement goals. So, be proactive!
Understanding what colleges expect you to contribute toward your child’s education is a great start. From there you can incorporate tax strategies, financial aid optimization, and the best use of your personal resources into one comprehensive plan — a plan that should help you pay for college as wisely as possible while protecting your assets and income for retirement.
All of this may seem daunting. But there are many online resources available that can explain the FAFSA process.
Likewise, Victory Capital has resources to help you save for your children’s future education expenses. Our College Savings Calculator can help you estimate expenses and account balances. And our Member Service Representatives are available to answer questions.